Analysts Size Up Third-Quarter Pay TV Subscriber Trends

While some remain concerned about the effect of cord cutting, Goldman Sachs’ Jason Armstrong argues that a “sequential rebound, with further improvement expected in the fourth quarter, combined with the woes at Netflix should continue to calm cord cutting fears.”

NEW YORK - It has been fairly quiet in the cord cutting debate as of late, but third-quarter earnings season could change that as cable TV, satellite TV and telecom companies report their latest quarterly subscriber trends in the coming weeks starting with AT&T on Thursday.

When pay TV industry subscriber figures dropped for the first time ever in the second quarter of 2010, the industry started discussing whether consumers were cutting the cord for cheaper online options. A 130,000 drop in the third quarter of last year, which followed the second-quarter decline of 246,000 subs, seemed to confirm fears before two quarters of growth alleviated some fears.

In this year's second quarter, pay TV operators lost 458,000 subscribers to end the first half at 100.1 million, according to SNL Kagan, with cable losses and the first-ever satellite TV decline being only partially compensated by gains for telecom giants. Going into third-quarter earnings season, analysts have differing views, but agree that things have improved over 2010 trends. With some looking at industry-wide figures and others at publicly traded distributors’ figures, some predict video subscriber gains, while others project a decrease, although in some projections that is less pronounced than in the year-ago period and definitely less pronounced than in the previous quarter.

Some on Wall Street expect the recent missteps by Netflix and third-quarter data to leave investors comfortable with the pay TV industry’s position. But Credit Suisse analyst Spencer Wang, whose team helped kick off the cord cutting debate more than a year ago, said in a report Wednesday: “We remain concerned on a secular basis about the risk of cord-cutting, given a difficult economic climate for consumers, consistent above-inflation increases in pricing to the consumer, and the growing availability of lower cost over-the-top (Internet-delivered) video services.”

Satellite TV "is expected to be a mixed bag, with strong gains from DirecTV due in part to its promotion of free NFL Sunday Ticket to new subscribers, offset by declines at Dish," he wrote in a report previewing earnings season. "Coming off a soft second quarter, we expect better subscriber performance in the seasonally-strong third quarter with results expected to improve year-over-year," he summarized. "While material growth acceleration is difficult in the current context of virtually zero occupied home growth, the cable/satellite sector has fundamentally defensive characteristics, and we continue to see minimal evidence of cord cutting."

Others also feel more relaxed on the cord cutting front. “Trends in cable are better versus last year, while trends in telecom and satellite are worse, which may temper the overall enthusiasm a bit,” said Goldman Sachs analyst Jason Armstrong. “Nonetheless, the sequential rebound, with further improvement expected in the fourth quarter, combined with the woes at Netflix should continue to calm cord cutting fears.”

Miller Tabak analyst David Joyce also highlighted improving trends in the latest quarter and a limited cord cutting effect. “With continued high unemployment and technology-driven cord cutting contributing to a small degree, there were net losses in the second quarter, and we expect improved net losses in the third quarter,” he told The Hollywood Reporter.

He projects publicly traded cable operators to report a 295,000 subscriber loss though as he also includes smaller and privately-held companies in his projections. That would still be better than the 519,000 decrease in the year-ago period. While telecom giant AT&T and Verizon will boost subs, satellite TV trends will be weaker, and cable will hold up better. Taking all this and small cable operators together, Joyce estimates that pay TV operators lost only 49,000 video subscribers in the third quarter.

While Joyce sees a slight gain at DirecTV offset by Dish declines for the second small quarterly satellite TV sub decline in a row, Armstrong expects that DirecTV will post 150,000 U.S. subscriber additions, while competitor Dish will record a loss of 75,000, which would put the satellite sector back in growth mode.

Armstrong predicts total industry video net losses of 231,000, less pronounced than the 491,000 losses in the second quarter, but higher than the 153,000 losses in the third quarter of 2010.